Incentive Based Compensation

Description of stock-based compensation plans – The Marathon Oil Corporation 2012 Incentive Compensation Plan (the "2012 Plan") was approved by our stockholders in April 2012 and authorizes the Compensation Committee of the Board of Directors to grant stock options, SARs, stock awards (including restricted stock and restricted stock unit awards) and performance awards to employees. The 2012 Plan also allows us to provide equity compensation to our non-employee directors. No more than 50 million shares of our common stock may be issued under the 2012 Plan. For stock options and SARs, the number of shares available for issuance under the 2012 Plan will be reduced by one share for each share of our common stock in respect of which the award is granted. For awards other than stock options or SARs, the number of shares available for issuance under the 2012 Plan will be reduced by 2.41 shares for each share of our common stock in respect of which the award is granted.

Shares subject to awards under the 2012 Plan that are forfeited, are terminated or expire unexercised become available for future grants. In addition, the number of shares of our common stock reserved for issuance under the 2012 Plan will not be increased by shares tendered to satisfy the purchase price of an award, exchanged for other awards or withheld to satisfy tax withholding obligations. Shares issued as a result of awards granted under the 2012 Plan are generally funded out of common stock held in treasury, except to the extent there are insufficient treasury shares, in which case new common shares are issued.

After approval of the 2012 Plan, no new grants were or will be made from the 2007 Incentive Compensation Plan, the 2003 Incentive Compensation Plan (the "2003 Plan"), the Non-Employee Director Stock Plan and the deferred stock benefit provision of the Deferred Compensation Plan for Non-Employee Directors (collectively, the "Prior Plans"). Any awards previously granted under the Prior Plans shall continue to be exercisable in accordance with their original terms and conditions.

Stock-based awards under the plans

Stock options – We grant stock options under the 2012 Plan and previously granted stock options under certain of the Prior Plans. Our stock options represent the right to purchase shares of our common stock at its fair market value on the date of grant. In general, our stock options vest ratably over a three-year period and have a maximum term of ten years from the date they are granted.

Stock appreciation rights – Prior to 2005, we granted SARs under the 2003 Plan. No SARs have been granted since then. SARs represent the right to receive shares of common stock equal in value to the excess of the fair market value of shares of common stock on the date the right is exercised over the grant price. In general, SARs vested ratably over a three-year period and have a maximum term of ten years from the date they were granted.

Restricted stock – We grant restricted stock and restricted stock units (collectively, "restricted stock awards") under the 2012 Plan and previously granted such awards under certain of the Prior Plans. The restricted stock awards granted officers generally vest three years from the date of grant, contingent on the recipient’s continued employment. We also grant restricted stock to certain non-officer employees and restricted stock units to certain international employees, based on their performance within certain guidelines and for retention purposes. The restricted stock awards to non-officers generally vest in one-third increments over a three-year period, contingent on the recipient’s continued employment. Prior to vesting, all restricted stock recipients have the right to vote such stock and receive dividends thereon. The non-vested shares are not transferable and are held by our transfer agent.

Stock-based performance units – Beginning in 2013, we grant stock-based performance units to officers under the 2012 Plan. At the grant date, each unit represents the value of one share of our common stock. These units provide a cash payout, based on the value of anywhere from zero to two times the number of units granted, upon the achievement of certain performance goals at the end of a 36-month performance period. The performance goals are tied to our total shareholder return (“TSR”) as compared to TSR for a group of peer companies determined by the Compensation Committee of the Board of Directors. Dividend equivalents accrue during the performance period and are paid in cash at the end of the performance period based on the number of shares that would represent the value of the units.

Common stock units – We maintain an equity compensation program for our non-employee directors under the 2012 Plan and previously maintained such a program under certain of the Prior Plans. All non-employee directors receive annual grants of common stock units. Those units granted prior to 2012 must be held until completion of board service, at which time the non-employee director will receive common shares. Common shares will be issued for units granted on or after January 1, 2012 upon completion of board service or three years from the date of grant, whichever is earlier. When dividends are paid on our common stock, directors receive dividend equivalents in the form of additional common stock units.

Total stock-based compensation expense – Total employee stock-based compensation expense was $75 million, $70 million and $65 million in 2013, 2012 and 2011, while the total related income tax benefits were $27 million, $25 million and $23 million in the same years. In 2013, 2012 and 2011, cash received upon exercise of stock option awards was $58 million, $41 million and $77 million. Tax benefits realized for deductions for stock awards exercised during 2013, 2012 and 2011 totaled $36 million, $24 million and $32 million.

Stock option awards – During 2013, 2012 and 2011, we granted stock option awards to both officer and non-officer employees. The weighted average grant date fair value of these awards was based on the following weighted average Black-Scholes assumptions:



	2013		2012		2011
Exercise price per share	$33.54		$33.52		$32.30
Expected annual dividend yield	2.1	%	2.2	%	2.1	%
Expected life in years	6.1		5.5		5.3
Expected volatility	38	%	41	%	40	%
Risk-free interest rate	1.6	%	1.2	%	1.7	%
Weighted average grant date fair value of stock option awards granted	$10.25		$10.86		$10.44

The following is a summary of stock option award activity in 2013.



	Number of Shares	Weighted Average Exercise price
Outstanding at beginning of year	19,536,965	$26.19
Granted	2,051,386	$33.54
Exercised	(2,718,639)	$22.36
Canceled	(764,825)	$34.02
Outstanding at end of year	18,104,887	$27.27

The intrinsic value of stock option awards exercised during 2013, 2012 and 2011, was $35 million, $40 million and $59 million.

The following table presents information related to stock option awards at December 31, 2013.



	Outstanding			Exercisable
Range of Exercise Prices	Number of Shares Under Option	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price	Number of Shares Under Option	Weighted Average Exercise Price
$7.99-12.75	259,164	0.3 years	$10.53	259,164	$10.53
$12.76-16.81	1,937,181	3 years	$15.13	1,937,181	$15.13
$16.82-23.20	4,255,365	5 years	$18.57	4,255,365	$18.57
$23.21-29.24	1,740,398	4 years	$24.59	1,489,683	$24.05
$29.25-36.03	7,541,433	7 years	$33.06	3,967,422	$32.70
$36.04-46.41	2,371,346	3 years	$38.19	2,277,817	$38.26
Total	18,104,887	5 years	$27.27	14,186,632	$25.64

As of December 31, 2013, the aggregate intrinsic value of stock option awards outstanding was $152 million. The aggregate intrinsic value and weighted average remaining contractual life of stock option awards currently exercisable were $144 million and 4 years.

As of December 31, 2013, the number of fully-vested stock option awards and stock option awards expected to vest was 18,023,888. The weighted average exercise price and weighted average remaining contractual life of these stock option awards were $27.24 and 5 years and the aggregate intrinsic value was $152 million. As of December 31, 2013, unrecognized compensation cost related to stock option awards was $16 million, which is expected to be recognized over a weighted average period of 2 years.

Restricted stock awards – The following is a summary of restricted stock award activity in 2013.



	Awards		Weighted Average Grant Date Fair Value
Unvested at beginning of year	4,177,884		$29.02
Granted	2,120,839		$33.69
Vested	(1,713,763	)	$27.78
Forfeited	(553,072	)	$30.58
Unvested at end of year	4,031,888		$31.80

The vesting date fair value of restricted stock awards which vested during 2013, 2012 and 2011 was $59 million, $36 million and $30 million. The weighted average grant date fair value of restricted stock awards was $31.80, $29.02, and $25.88 for awards unvested at December 31, 2013, 2012 and 2011.

As of December 31, 2013, there was $96 million of unrecognized compensation cost related to restricted stock awards which is expected to be recognized over a weighted average period of 2 years.

Stock-based performance unit awards – During 2013, we granted 353,600 stock-based performance unit awards to officers and at December 31, 2013, there were 93,100 units outstanding. The key assumptions used in the Monte Carlo simulation to determine the December 31, 2013 fair value of stock-based performance units were:




Valuation date stock price	$35.30
Expected annual dividend yield	2.1	%
Expected volatility	26	%
2-Year risk-free interest rate	0.4	%
Fair value of stock-based performance units outstanding	$34.08

Cash-based performance unit awards – Prior to 2013, cash-based performance unit awards were granted to officers that provide a cash payment upon the achievement of certain performance goals at the end of a defined measurement period. The performance goals are tied to our TSR as compared to TSR for a group of peer companies determined by the Compensation Committee of the Board of Directors. The target value of each performance unit is $1, with a maximum payout of $2 per unit, but the actual payout could be anywhere between zero and the maximum. Because performance units are to be settled in cash at the end of the performance period, they are accounted for as liability awards.

During 2012, we granted 12.7 million performance units, all having a 36-month performance period. During the third quarter of 2011, we granted 15 million performance units, a portion of which had a 30-month performance period and a portion of which had an 18-month performance period to reflect the remaining periods of the original 2011 and 2010 performance unit grants outstanding prior to the spin-off. Compensation expense associated with cash-based performance units was $9 million, $12 million and $32 million in 2013, 2012 and 2011. The expense for 2011 included $14 million paid on three groups of performance unit grants outstanding at June 30, 2011, that were accelerated with the total payout determined based on performance through the effective date of the spin-off of our downstream business.